A New Plunge in Market Breadth Triggered A Fall Clean-Up – The Market Breadth

Stock Market Commentary

Technology stocks are now the main stocks climbing the wall of inflation. A notable and stark rotation unfolded this last trading week. A new plunge in market breadth seemingly accompanied selling of almost everything without the big cap tech label. With a topping in market breadth confirmed, I triggered a fall clean-up of losing stock positions. Even more scrutiny will come the further market breadth falls.

The Stock Market Indices

The S&P 500 (SPY) gained 0.3% for the week. The churning trading action created one marginal all-time high. The index did well to hold up given the new plunge in market breadth.

The S&P 500 (SPY) broke out above its 50DMA and likely brought the bearish cycle to an end.
The S&P 500 (SPY) churned most of the week right around its all-time high.

The NASDAQ (COMPQX) was the clear winner of the week. This tech-laden index separated from the pack with a 1.2% gain for the week. The NASDAQ even managed to gap up to an all-time high as its final act of the week.

The NASDAQ (COMPQX) gained 0.7% to end a week the strung together a series of all-time highs.
The NASDAQ (COMPQX) finished the week with a small gap up to a 0.4% gain and an all-time high.

The major breakout for the iShares Russell 2000 ETF (IWM) became a major failure this last trading week. IWM sold off for 4 of 5 days and closed below the breakout line formed by the former all-time high. Small caps transitioned from driving an expansion of market breadth to helping punish market breadth. This reversal is a major disappointment and produced two failed trades on IWM calls. I assumed that the breakout was the start of out-performance for IWM. Instead, this fake-out may prove to be a new sustained top for IWM. IWM’s breakdown helped trigger my fall clean-up of losing stocks.

The iShares Russell 2000 ETF (IWM) finished a complete reversal of November’s breakout and looks poised to return to sideways, range-bound trading.

Financials also caught the selling bug. A gap down on Friday in the Financial Select Sector SPDR Fund (XLF) created a 1.1% loss and even a close below support at the 50-day moving average (DMA) (the red line below). As with the S&P 500, the XLF has enjoyed a relatively friendly relationship with its 50DMA support. Accordingly, I will go long XLF on a close above support. If market breadth continues to weaken, I fully expect XLF to finally test 200DMA support.

The Financial Select Sector SPDR Fund (XLF) closed the week with a 50DMA breakdown. Will XLF recover in due time just like all the other breakdowns this year?


Stock Market Volatility

The volatility index (VIX) showed some resilience for the week even after fading from the 19 level on Friday. For the first time in a long time, I am not carrying UVXY call options as a market hedge. UVXY’s recent rapid decay has greatly reduced its usefulness, at least absent precision timing. I see no reason to use UVXY until those dynamics change. In the meantime, I expect the VIX to just churn anyway.

A rounded bottom for the volatility index (VIX) could be setting up a major surge in the coming weeks.
The volatility index (VIX) had an upward bias for most of the week but remains trapped in a short-term range.

The Short-Term Trading Call After Triggering A Fall Clean-Up

  • AT50 (MMFI) = 50.4% of stocks are trading above their respective 50-day moving averages
  • AT200 (MMTH) 55.8% of stocks are trading above their respective 200-day moving averages
  • Short-term Trading Call: neutral

AT50 (MMFI), the percentage of stocks trading above their respective 50DMAs, fell all week. My favorite technical indicator reversed all of November’s expansion of market breadth. In the process, AT50 confirmed the potential topping I pointed out just below the overbought threshold of 72%. At that time, I changed my short-term trading call from cautiously bullish to neutral. I recognized the bearish implications of the failure to break the overbought threshold, but bullish market momentum prevented me from flipping bearish. The bullish momentum remained with (big cap) technology stocks but drained from a wide swath of the stock market. This divergence triggered my fall clean-up of losers.

I reviewed my positions and cut ties with all losing stocks which failed at critical support levels. When market breadth expands, I can remain patient in the expectation that tailwinds will sweep up more and more laggards. I particularly relied on seasonal strength in the stock market to give me time for more patience. That patience ended with these clean-up sales.

‘Tis the season for tax loss harvesting, so without expanding market breadth, losers should struggle for the remainder of the year. These tax loss sales may already be underway in order to avoid wash sale tax rules when repurchasing these same stocks for 2022 positioning (related to the January effect). Whatever the motivations for the weakness, the technicals plunging market breadth tell me almost all I need to know. If market breadth continues to worsen, I will further tighten my tolerance for lagging and losing positions.

AT50 (MMFI) is now down for the month of November as market breadth lost all its momentum right under the overbought threshold of 70%.
AT200 (MMTH) also dropped into negative territory for the month of November. AT200 is now in danger of resuming a downtrend.

A Change for Stock Chart Reviews

Starting with this Market Breadth post, I am spinning off the Stock Chart Reviews into a separate segment. This split will help speed up my delivery of market breadth news. Market breadth dynamics form the core of my assessments of the stock market. As a result, these posts get priority.

Be careful out there!

Footnotes

“Above the 50” (AT50) uses the percentage of stocks trading above their respective 50-day moving averages (DMAs) to measure breadth in the stock market. Breadth defines the distribution of participation in a rally or sell-off. As a result, AT50 identifies extremes in market sentiment that are likely to reverse. Above the 50 is my alternative name for “MMFI” which is a symbol TradingView.com and other chart vendors use for this breadth indicator. Learn more about AT50 on my Market Breadth Resource Page. AT200, or MMTH, measures the percentage of stocks trading above their respective 200DMAs.

Active AT50 (MMFI) periods: Day #403 over 21%, Day #66 over 31%, Day #38 over 41% (overperiod), Day #1 under 51% (underperiod ending 17 days over 51%), Day #3 under 60% (underperiod), Day #183 under 72%

Source for charts unless otherwise noted: TradingView.com

Grammar checked by Grammar Coach from Thesaurus.com

Full disclosure: long IWM call

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*Charting notes: Stock prices are not adjusted for dividends. Candlestick charts use hollow bodies: open candles indicate a close higher than the open, filled candles indicate an open higher than the close.

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